Pro-business bias reflects Commission's flawed terms of reference

Paul Sweeney: This report has some excellent analyses and many useful recommendations which will be of use to a progressive government in the future.

However, the report is a child of the economic thinking which brought this once successful economy to its knees. Low direct taxes, high spending taxes, combined with de-regulation and privatisation, pro-cyclically have been abandoned by politician worldwide. Even deeply conservative Irish economists are talking endlessly of state intervention on a scale never envisaged by anyone. Their debate is not on the scale but on the technicalities of the taxpayers’ billions of euros in subsidies to the banks.

The core term of reference of keeping low taxes was out of date before the Commission commenced its work. The crash had already begun. It is regrettable that the Minster for Finance, Mr Lenihan, did not amend the terms of reference for the members and so move with the harsh new reality after the crash.

The emphasis of the report appears to be to impose substantial additional “burdens” (to use the Commission’s own pejorative and ideological description of tax) on citizens and to substantially reduce the “burden” on business. The lack of balance produced a zero-sum outcome. This is unnecessary.

This pro-business bias reflects the Commission’s flawed terms of reference and its composition. The Commission did not reflect civil society. It was hand-picked by the Department of Finance to reflect a dominant view of business.

In stark contrast to the Irish Government’s narrow and biased Commission’s terms of reference, the Norwegian government, which is left of centre, appointed a Commission on Distribution of Wealth and Income. That Commission of experts was appointed to research and explain the increase of inequality, and also how the distribution of the resources and of wealth can be made more equitable by policy changes in the future. They submitted their report in April. It can be read here, by those who speak Norwegian!And it is shorter too, being only 399 pages as against ours of 550!

While equity was one of our Commission’s terms of reference and is very important, it erred in the balance between equity and what it perceived to be of benefit to business.

The economy crashed because the Government, regulators, and the Departments of Finance and Enterprise thought that they were doing business favours by being pro-business at almost all costs. They did this during the domestic induced boom from 2001 by de-regulation/no regulation, privatisation, massive tax breaks, subsidies, high taxes on consumption (which pushed up the overall price level and costs), and by pursuing pro-cyclical, demand-boosting economic policies. This lethal cocktail of bad economics brought this economy to its knees, where it rests.

Low taxes means low public services. In the real boom of the 1990s, it was possible to have low taxes and increased public spending. When the economy over-heated, Government should have stopped cutting taxes. It did not. It gave even more tax subsidies to the wealthy and to property and business, without assessing their impact on equity and the economy. That was the time for real tax reform.

That many, though, not all, tax expenditures are to be terminated, is welcome in the report. But the recommendation to maintain low direct taxes on incomes and on business profits in a fiscal crisis (in accordance with Minister Lenihan’s unamended terms of reference) at a time when taxes are being, and will continue to be, raised, may mean maintaining regressive tax policies.

Irish business already enjoys a) one of the lowest rates of company tax in the developed world; b) the lowest social contributions in the world; c) many tax subsidies to further reduce the low business taxes; and d) an array of state agencies (e.g. IDA, SFadco, Udaras, Forfas, BIM, Teagas, SFI, FAS etc), largely devoted to pursuing the business agenda, paid, not by the beneficiaries, but by taxpayers.

Ireland has the lowest tax wedge in the developed world. This is shown dramatically on graph 7.3 on page 184 in the report. Yet the report is concerned with keeping income taxes low. (Income taxes are generally much more progressive than consumption taxes). It devotes little analysis to consumption taxes. This year, taxes on consumption will raise €137 for every €100 raised in income taxes. Income taxes are much more progressive than taxes on spending. Consumption taxes, now so high, do not take into consideration ability to pay. The report gave but a few pages to consideration of these big taxes. This is regrettable.

The balance of this report is skewed against social equity. It should be redressed by increasing the tax contribution from business by eliminating most tax expenditure for that sector. Instead, there are many new tax breaks for business. They are not uncosted. Why? These costings should be FOI’d.

It is extraordinary that the term Transfer Pricing Fixing did not appear once in a major 550 page report on taxation. This is where MNC shift or transfer their taxes to tax havens or low tax countries, by manipulating internal pricing (see Irish Times today 7th September on Shering Plough). Ireland has been a great beneficiary of TFP, as firms shift profits here, to avail of our low company taxes. However, this is at some cost of our fellow Member states in Europe and the USA. It is artificial and cannot last. One would expect at least a discussion of the implications of the termination of TFP from a body supposedly representing civil society.

The large tax revenue impact of transfer-pricing by MNCs in boosting Irish Corporation tax revenue can be determined from the profit levels and inflated trade data of some sectors. Many independent economists have remarked on the skewed output in some sector in Irish trade and other data. The subject is taboo in Official Ireland.” That this “independent” Commission did not use the term Transfer Pricing in its report on the very subject of taxation is telling!

Still there are many interesting sections and recommendations in the report. The analyses of the Commission are interesting and contribute positively to our knowledge of this complex subject.

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.